Abandoning the Welfare State in Europe?

February 19th, 2012
in Op Ed

by Dirk Ehnts

When thinking about current economic problems in Europe, it is clear that we have had a problem with the adjustment in the euro zone. Some countries saw productivity rise faster than wages, other experienced the opposite. So, price levels are now “wrong” in the sense that current account balances are not sustainable. Germany net exports too much, the periphery still net imports too much. It seems now that the Troika is pushing ahead its agenda of abandoning all those ineffective structural rigidities. Here is the Economonitor:

The Greek minimum wage is apparently a point of contention between the Troika (ECB/EU/IMF) and the Greek government. The NY Times cites competitiveness gains as a rationale for the minimum wage cut:

The goal of any pay cuts would be to help make Greek workers, who are generally less productive than workers elsewhere in Europe, able to compete more effectively inside the euro zone, where countries share a common currency that does not allow devaluations to help even out differences in labor costs.

Huh? See below. The going line seems to be that the Greeks are lazy. They earn minimum government-negotiated wages without actually doing a whole lot because they’re uncompetitive. This is wrong; the data do not support this view.

Follow up:

There is good reason to believe that these measures will further depress domestic demand while not leading to an increase in employment. Greece will not be able to export itself out of the slump by relying on minimum wage workers, which are typically not highly qualified. Entering a competition with China is a race that Greeks cannot win.

In the long-run, the determinants of economic growth are something else anyway. So structural reforms are necessary, that’s right, but it seems to me that the current EU leadership mistakenly identifies these with lower wages. I think – and most growth theorists would probably support me on this – that education is the driver of social change, transforming uneducated into highly skilled and knowledgeable (and much more) people. This has huge positive externalities. Garfinkel et al. in their book
Wealth and Welfare States make the same point:

It is widely believed that the welfare state undermines productivity and economic growth, that the United States has an unusually small welfare state, and that it is, and always has been, a welfare state laggard. This book shows that all rich nations, including the United States, have large welfare states because the socialized programs that comprise the welfare state-public education and health and social insurance–enhance the productivity of capitalism. In public education, the most productive part of the welfare state, for most of the 19th and 20th centuries, the United States was a leader.

The same story is told by the brilliant Slvie Nasar in clip #2 on the website of INET.  It is perhaps a bit harsh, but Greece is in fact a social experiment where the proposition is ‘The welfare state is bad’, ‘A sovereign currency is unnecessary’ and ‘More saving will make the economy healthy again’ are tested.  The social pain should be measured by looking at employment, real and nominal wages, consumption, poverty plus some indicators that presumably tell you something about future growth (education, levels of trust among people, and trust in democracy).  It should not be measured by whether European banks finally manage to get out of Greek sovereign bonds before they collapse.  In Germany there is this saying ‘Operation successful – patient dead’.  You cannot save Greece without saving the Greeks.

Editor's note: Be sure to follow the link ( INET) and watch the excellent video series.

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About the Author

Dr. Dirk Ehnts is a research assistant at the Carl-von-Ossietzky University of Oldenburg (Germany). His focus is on economic integration and economic geography, covering trade, macro and development. He is working at the chair for international economics since 2006 and has recently co-authored a book on Innovation and International Economic Relations (in German). Ehnts has written at his own blog since 2007: Econblog 101. Curriculum Vitae.


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